Oil & Gas: Resolving inconsistent quality determination provisions for the sale of fuel oil

In Septo Trading Inc. v Tintrade Limited [2020] EWHC 1795 the Commercial Court considered whether a certificate of quality for fuel oil was final and binding on the parties where the specific terms agreed said the certificate was final and binding, but the 2007 BP General Terms (incorporated) made it ‘pay now, argue later’. The Court’s decision illustrates the importance of not relying upon inconsistency (or priority) clauses when drafting or agreeing terms.

Facts

The Claimant, Septo Trading Inc (“Septo”) was a buyer, and the Defendant, Tintrade Limited (“Tintrade”), was the seller of fuel oil that had been loaded on board the vessel ‘NOUNOU’.

On 20 June 2018, the parties entered into a ‘recap’ which evidenced the contract for supply of 36,000 – 42,000 mt of high-sulphur fuel oil RMG 380 as per ISO 8217:2010 (the “Recap”). ISO 8217:2010, deals with marine fuels, and provides by clause 5.1 that the fuel shall conform to the characteristics within certain limits. In this case, the appropriate limits required that total sediment aged should not exceed 0.1%. Clause 5.2 provides that the fuel shall be “a homogenous blend of hydrocarbons derived from petroleum refining”.

The ‘Determination of Quality and Quantity’ clause in the Recap provided:

“As ascertained at loadport by mutually acceptable first class independent inspector, or as ascertained by loadport authorities and witnessed by first class independent inspector (as per local practice at time of loading). Such result to be binding on parties save fraud or manifest error. Inspection costs to be shared 50/50 between Buyer/Seller.” (emphasis added)

The clause entitled ‘General’ provided that the BP 2007 General Terms and Conditions (“BP Terms”) for fob sales applied unless they conflicted with terms of the Recap. The relevant BP Terms provides:

“1.2 Certificates of Quantity and Quality

1.2.1 Provided always the certificates of quantity and quality … of the Product comprising the shipment are issued in accordance with sections 1.2.2 or 1.2.3 below then they shall, except in cases of manifest error or fraud, be conclusive and binding on both parties for invoicing purposes and the Buyer shall be obliged to make payment in full in accordance with Section 30.1 but without prejudice to the rights of either party to make any claim pursuant to Section 26.” (emphasis added)

Joint instructions were provided by Septo to SGS Latvija Limited (“SGS”) to perform quantity and quality determinations of the fuel oil to be shipped at the loading port selected by Tintrade. SGS took samples from a number of shore tanks in June 2018. The sample was analysed and by a certificate dated 2 July 2018 the Total Sediment Potential (“TSP”) was stated on behalf of SGS to be 0.4% which is within the contractual specification. (TSP is a measure of how much sediment (asphaltenes) any given fuel oil will produce in long term storage. 41,335mt of cargo was loaded on board NOUNOU between 30 June and 2 July 2018.)

Between 2 and 11 July 2018 the cargo was transported to Gibraltar where it was transferred to two other vessels pursuant to a contract of sale between Septo and Macoil International SA (“Macoil”). On 17 July 2018, Saybolt España S.A.L. issued a certificate of analysis in respect of samples drawn from one of those vessels after Macoil had received the cargo. The certificate stated that the TSP of the sample was 0.37%, being in excess of the maximum permitted TSP value under ISO 8217:2010. Samples collected by SGS prior to and during the loading of the other vessel were subsequently tested by Inspectorate Rotterdam in the Netherlands on 31 July 2018. Their tests showed that whilst most samples from the shore tanks were on-spec, some were off-spec.

By the time the cargo had been found to be off-spec Septo had already paid the purchase price to Tintrade, but had not been paid by Macoil. Septo subsequently learned that Macoil had sold approximately 10KT of the cargo to its customers before it was found to be off-spec. After failing to persuade Tintrade to re-purchase the cargo and failing to agree a reduced price with Macoil, Septo decided to blend the off-spec cargo to produce an on-spec cargo and sell the re-blended product. Septo retrieved the 31KT of cargo remaining on board one of the vessels and the cargo was transported to Malta. In Malta the fuel oil was successfully blended with straight run fuel oil on board and Septo was able to re-sell the blended cargo.

Septo argued that the cargo delivered was off-spec and sought damages of USD 7,785,478. In this respect, it argued that the effect of clauses 1.2.1 of the BP Terms was a ‘pay now, argue later’ provision such that it only made the certificate of quality binding for the purposes of an invoice – but did not prevent a subsequent dispute.

Although the actual loss suffered by Septo, in respect of the re-blended fuel was said to be USD 3.82 million, the sum claimed as damages by the Buyer in respect of the total cargo was USD 7,785,478.

Decision

Certificate of Quality

The Commercial Court considered whether clause 1.2.1 of the BP Terms is ‘in conflict’ with the “Determination of Quality and Quantity” clause in the Recap, such that Tintrade was correct that the Recap applied and the certificate of quality was final and binding for all purposes (save for fraud or manifest error).

In Pagnan v Tradax [1987] 2 Lloyd's Reports 342 Bingham LJ explained that it is necessary to keep in mind that “it is a commonplace of documentary construction that an apparently wide and absolute provision is subject to limitation, modification or qualification by other provisions. It does not make the later provisions inconsistent or repugnant.” He went on to say: “It is not enough if one term qualifies or modifies the effect of another; to be inconsistent a term must contradict another or be in conflict with it, such that effect cannot fairly be given to both clauses.”

It is apparent that the Court should keep well in mind that the two clauses in question are all part of the same contract and that the parties chose to make the contract subject to the BP Terms. Thus, it would be wrong to approach the question of construction with any predisposition to find inconsistency between the Recap and the BP Terms. Equally, it would be wrong to approach the question of construction on the assumption that there is no inconsistency. The provision in the Recap that the BP terms apply where there is no conflict with the terms of the Recap show that the parties accept that there may be conflict or inconsistency.

The Commercial Court concluded that clause 1.2.1 of the BP Terms was not in conflict with the Recap. Rather, it qualified the Recap. The clause in the Recap entitled “Determination of Quality and Quantity”, had it stood alone, would have had the effect contended for by Tintrade, that is, that in any claim for breach of contract the determination of the independent inspector would be binding as to quality. But it did not stand alone. It stood together with clause 1.2.1 of the BP Terms. That clause could be read together with the Recap by regarding it as qualifying the otherwise general effect of the Recap by saying that the binding nature of the determination of the independent inspector was limited to questions of invoicing, without prejudice to any later claim for breach of contract.

In that way both clauses could be read together and effect can be given to both of them. Thus, clause 1.2.1 is not in conflict with the Recap. It qualified or explained the Recap.

As a result, the certificate of quality was not final and binding and Septo was entitled to make a claim for damages.

Damages

The Commercial Court found that there was a market for off-spec oil in 2018. Septo submitted that TSP fuel could be sold at USD 350 per mt which reflected the price that Septo hoped to achieve after a successful re-blending operation. The Court found that on the basis of USD 350 per mt. the loss suffered by Septo was USD 3,058,801. Septo’s damages claim for USD 7,785,478 was based on a notional cost of cure as opposed to the actual cost of cure in respect of the re-blended fuel. Septo was therefore awarded the sum of USD 3,058,801.

Commentary

Two issues of importance arise from this decision of the Commercial Court for drafting of oil and gas contracts:

First, caution should be exercised in relying on inconsistency (or priority) clauses when drafting or interpreting contracts. As explained by Sir Kim Lewison “The court is reluctant to hold that parts of a contract are inconsistent with each other, and will give effect to any reasonable construction which harmonises such clauses” (see Lewison, The Interpretation of Contracts (2015) 6th Ed., paragraph 9.13). As such, it is good drafting practice to seek to ensure that any potential divergency of approach between specific and general terms of a contract are dealt with at drafting stage by removing any divergence – as English law will not necessary disapply one element through relying on an inconsistency (or priority) clause.

Second, clause 1.2.1 of the BP Terms operate on a ‘pay now, argue later’ basis. Therefore, certificates of quantity and quality do not give the parties finality. They operate merely to create certainty for the purposes of invoicing. Materially the same provision appears in the current 2015 BP General Terms and Conditions at clause 2.2.1. However, the window for a claim is not open ended. Clause 59 requires that: “Any complaint of deficiency of quantity or of variation of quality shall be admissible only if notified in writing to the Seller within 45 days of the completion of discharge date and accompanied by evidence fully supporting the complaint”. As such the current 2015 BP General Terms and Conditions continue to appreciate the importance of swift notification of quality disputes – such as to prevent the type of belated claim made in Trafigura Beheer BV v Renbrandt Ltd [2017] EWHC 3100 (Comm). (see CMS Annual Review of developments in English oil and gas law (2018 Edition) page 25).

Judge: Mr Justice Teare